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Article
Publication date: 6 February 2020

John E. McEnroe and Mary Mindak

The purpose of this paper is to investigate the empirical effects of modifying the calculation of the diluted earnings per share (EPS) number in an international compared…

Abstract

Purpose

The purpose of this paper is to investigate the empirical effects of modifying the calculation of the diluted earnings per share (EPS) number in an international compared to the US accounting setting. The diluted EPS calculation originated in the US Accounting Principles Board Opinion No. 15 (APB 15) and continues in both the US Statement of Financial Accounting Standard No. 128 (SFAS 128), EPS and International Accounting Standard 33 (IAS 33) EPS. Our analysis of the treatment of dilutive warrants and options versus other dilutive convertible securities extends the work of McEnroe and Sullivan (2018), hereafter referred to as McEnroe and Sullivan, 2018 and provides more insight into the impact on the international accounting regulatory environment. Using the McEnroe and Sullivan, 2018 proposed alternative EPS model, we investigate revising the EPS model and analyzing the impact on international data observations.

Design/methodology/approach

The authors selected our sample from the Compustat Fundamentals Annual Database – North America Daily file. Although using the Global – Daily file would be ideal, the data the authors need to make the alternative EPS calculations is not available in the Global database. The authors pulled data for the years 2010 through 2016 for both the USA and international companies. The authors eliminated companies based upon the criteria described later in the paper (which is comparable to the data restrictions set in McEnroe and Sullivan, 2018).

Findings

The results are comparable to the results of the US study. The authors find an average increase in diluted EPS to be 4.57 per cent and the median increase to be 2.43 per cent. McEnroe and Sullivan, 2018 found the average increase in diluted EPS to be 5.72 per cent and the median increase to be 3.81 per cent. The authors do not find a significant difference in the overall average percentage increase when looking across all of the years in the data set and comparing the USA to international observations. Overall, the authors further extend the previous conclusion of McEnroe and Sullivan, 2018 that both the USA and international standard setters should consider the alternative diluted EPS model for accounting regulation.

Research limitations/implications

The study consists of a sample of 262 international firms. An extended study, of all firms subject to International Accounting Reporting Standards (IFRS) might be used by the International Accounting Standards Board and then stratified by country to see if the capital structure of a particular nation’s securities is particularly impacted by the results.

Practical implications

As McEnroe and Sullivan, 2018, p. 499 state, the Financial Accounting Standards Board (FASB) avers that the price-earnings ratio of an equity is perhaps the most frequently cited business statistic in equity analysis. The authors cite one source Kuepper, (2018), that it is “one of the most popular metrics” on the international level of stocks using IFRS. Given that the denominator, in the price-earnings ratio is the focus of our study, as in the case McEnroe and Sullivan, 2018, the results have implications for the further study and revision of IAS 33.

Social implications

Again, as in the case of McEnroe and Sullivan, 2018, if currently reported diluted EPS results in lower equity prices than under the proposed model, an effect might be higher debt and equity costs. Since the authors are unaware of any rationale for the current treatment, the authors feel that the current formulation is less than optimal and that the issue of its provisions should be examined.

Originality/value

A review of the literature found no other study other than McEnroe and Sullivan, 2018 undertaking the issue.

Details

Accounting Research Journal, vol. 33 no. 2
Type: Research Article
ISSN: 1030-9616

Keywords

Book part
Publication date: 27 October 2016

Alexandra L. Ferrentino, Meghan L. Maliga, Richard A. Bernardi and Susan M. Bosco

This research provides accounting-ethics authors and administrators with a benchmark for accounting-ethics research. While Bernardi and Bean (2010) considered publications…

Abstract

This research provides accounting-ethics authors and administrators with a benchmark for accounting-ethics research. While Bernardi and Bean (2010) considered publications in business-ethics and accounting’s top-40 journals this study considers research in eight accounting-ethics and public-interest journals, as well as, 34 business-ethics journals. We analyzed the contents of our 42 journals for the 25-year period between 1991 through 2015. This research documents the continued growth (Bernardi & Bean, 2007) of accounting-ethics research in both accounting-ethics and business-ethics journals. We provide data on the top-10 ethics authors in each doctoral year group, the top-50 ethics authors over the most recent 10, 20, and 25 years, and a distribution among ethics scholars for these periods. For the 25-year timeframe, our data indicate that only 665 (274) of the 5,125 accounting PhDs/DBAs (13.0% and 5.4% respectively) in Canada and the United States had authored or co-authored one (more than one) ethics article.

Details

Research on Professional Responsibility and Ethics in Accounting
Type: Book
ISBN: 978-1-78560-973-2

Keywords

Book part
Publication date: 18 July 2017

John E. McEnroe, Ning Du and Mark Sullivan

The typical unqualified audit report of publicly traded firms in the United States indicates the nature of the audit and an opinion that the firm’s financial statements…

Abstract

The typical unqualified audit report of publicly traded firms in the United States indicates the nature of the audit and an opinion that the firm’s financial statements fairly present the financial position and the results of operations of the audited company. Accordingly, some users of the financial statements, including investors, do not consider the unqualified opinion to be very useful in providing other informational value about the particular audit. In this paper, the authors examined the views of two stakeholders in the US financial reporting system, auditors in large public accounting firms and Chief Financial Officers (CFOs) in the Fortune 1000. The authors elicited their perceptions involving a Public Company Accounting Oversight Board (PCAOB) proposed auditing standard commonly referred to as “the other information standard.” This standard, if adopted, would require the auditor to evaluate information other than the audited financial statements and the related audit report for (1) a material inconsistency, (2) a material misstatement of fact, or (3) both, and if they exist, communicate them in the auditor’s report. The authors developed their research instrument based upon its perceived potential effects on the audit if adopted, some of which were referenced in the exposure draft of the proposed standard (PCAOB, 2013). They found that a majority of each groups believed, among other effects, that the proposed standard would increase audit costs, subject both the auditor and the reporting firm to increased litigation risk, and that its implementation costs by affected firms would exceed any benefits to financial statement users created by the standard.

Details

Parables, Myths and Risks
Type: Book
ISBN: 978-1-78714-534-4

Keywords

Book part
Publication date: 20 November 2002

Stanley C. Martens and John E. McEnroe

A decade ago, we conducted a study (reported inMartens McEnroe, 1992) with the result that auditors neglected substance over form and perceived little exposure to…

Abstract

A decade ago, we conducted a study (reported inMartens McEnroe, 1992) with the result that auditors neglected substance over form and perceived little exposure to litigation in doing so. The theoretical basis of the previous paper was implicit contract theory. We have had occasion to change our analysis since the previous work; in this paper we focus on the commodification of audits, and trace the neglect of substance over form to that commodification. We present evidence that recent actions by the SEC have altered the perception of auditors that the letter of GAAP (Generally Accepted Accounting Principles) is an aegis against litigation, and that audits which do not opine on substance over form are perfectly marketable commodities. We find, however, that audits which do not opine on substance vs. form are extant, and we cannot conclude that a change in the conditions of production of the audit commodity has occurred or is imminent.

Details

Mirrors and Prisms Interrogating Accounting
Type: Book
ISBN: 978-1-84950-173-6

Article
Publication date: 1 April 1990

John E. McEnroe

The US Auditing Standards Board Statement on Auditing Standards(SAS) No. 54 concerns Illegal Acts by Clients. SAS No. 54 isdiscussed and its requirements are summarised…

Abstract

The US Auditing Standards Board Statement on Auditing Standards (SAS) No. 54 concerns Illegal Acts by Clients. SAS No. 54 is discussed and its requirements are summarised. Written comments on a draft of SAS No. 54 from the auditing community have been analysed. Issues that were highlighted included lack of requisite skills, legal exposure, materiality threshold, responsibility, use of legal counsel, definition of illegal acts and communication with the audit committee. Opinions regarding possible consequences of SAS No. 54 came from both ends of the spectrum.

Details

Managerial Auditing Journal, vol. 5 no. 4
Type: Research Article
ISSN: 0268-6902

Keywords

Article
Publication date: 5 November 2018

John E. McEnroe and Mark Sullivan

This paper aims to investigate the empirical effects of an inconsistency in the calculation of the diluted earnings per share (EPS) number which originated in Accounting…

1432

Abstract

Purpose

This paper aims to investigate the empirical effects of an inconsistency in the calculation of the diluted earnings per share (EPS) number which originated in Accounting Principles Board Opinion No. 15 (APB 15) and continues in Statement of Financial Accounting Standard No. 128 (SFAS 128), EPS. The discrepancy involves the treatment of dilutive warrants and options versus other dilutive convertible securities and is explained in the section of this paper where the authors describe the proposed alternative EPS model. In a sample of 55 publicly traded companies in which they applied their model, it was found that the average increase in diluted EPS to be 5.7 per cent and the median increase to be 3.8 per cent. The authors believe that SFAS 128 should be considered, along with other factors, to be revised to direct that diluted EPS be computed in accordance with their model.

Design/methodology/approach

The authors selected a sample of companies from the Compustat Annual Database that had either Convertible Debt or Convertible Stock or both with a year-end between July 1, 2011 and July 1, 2012 which was the most recent data available at the time of the initial study. They then used the model assuming a “repurchase” of common shares as if the “treasury stock method” which applies to options and warrants also applied to these conversions. They then reduced the number of shares initially used to compute diluted EPS by the number of assumed repurchased shares. Using the revised number of shares, the authors recomputed diluted EPS as a percentage of the originally reported diluted EPS.

Findings

For the 55 companies in the sample, the average increase in diluted EPS using the “treasury stock method” was 5.7 per cent. The median increase was 3.8 per cent. The largest increase was 26.6 per cent and the smallest was 0 per cent.

Research limitations/implications

This is a one-year study of the sampled firms. A multi-year sample is recommended for further research. Also, the sample might be applied to foreign entities under the jurisdiction of IAS 33.

Practical implications

According to the Financial Accounting Standards Board (FASB) the price-earnings ratio of an equity is perhaps the most frequently cited statistic in the business of equity investments. As the denominator in the price-earnings ration is the “diluted” EPS figure calculated under generally accepted accounting principles (GAAP) under Statement of Financial Accounting No. 128 (SFAS 128), the results have very significant implications for the recommended study and revision of the diluted EPS statistic.

Social implications

If the current diluted EPS reported numbers result in lower stock prices than would otherwise be the case under the authors’ model, then it seems likely that these companies with large amounts of debt would have a higher cost of equity capital than would otherwise be the case. The overall result would be a different allocation of equity capital than would be the case if convertible debt and convertible equity were treated the same way as options and warrants. As we are unaware of a rationale for the disparate treatment, it is believed that this a is a misallocation caused by a statement of the Financial Accounting Standards Board (FASB) that seems flawed and recommend that it be considered to be revised.

Originality/value

A review of the literature found no other study addressing this issue.

Details

Accounting Research Journal, vol. 31 no. 4
Type: Research Article
ISSN: 1030-9616

Keywords

Article
Publication date: 1 June 1993

Stanley C. Martens and John E. McEnroe

Investigates the commitment of various members of the US financialcommunity to neutrality in financial reports. The research designinvolves five cases in which…

Abstract

Investigates the commitment of various members of the US financial community to neutrality in financial reports. The research design involves five cases in which “GAAP‐condoned” non‐neutral accounting improves a company′s accounting numbers. The populations selected were accounting academics, public accountants, financial analysts and controllers (or chief financial officers) of major corporations. Finds no significant differences among any of the populations as measured by their reactions to any of the five cases. Also there is no evidence for a strong commitment to neutrality on the part of the respondents. Rather, suggests some slight approval for accounting practices which generate favourable numbers and have no adverse impact on a company′s cash flows.

Details

Managerial Auditing Journal, vol. 8 no. 6
Type: Research Article
ISSN: 0268-6902

Keywords

Book part
Publication date: 15 August 2014

John E. McEnroe and Mark Sullivan

The Dodd–Frank Wall Street Reform and Consumer Protection Act calls for substantially increased government regulation. Whether those regulations are, in some sense…

Abstract

The Dodd–Frank Wall Street Reform and Consumer Protection Act calls for substantially increased government regulation. Whether those regulations are, in some sense, appropriate is a function of whether the benefits of the increased regulation exceed the costs. Those costs and benefits, however, are probably impossible to measure, at least at this early stage of the implementation of the Dodd–Frank reforms. On the other hand, financial professionals who regularly deal with governmental regulations probably have a good sense of the costs and benefits based on their own experience with other similar regulations. This chapter reports the result of a survey of high-level auditors and CFOs regarding their perceptions of the costs and benefits of the main parts of the financial regulatory reform incorporated into the Dodd–Frank legislation. It concludes that there is support among these individuals for some aspects of Dodd–Frank, but no consensus.

Details

Managing Reality: Accountability and the Miasma of Private and Public Domains
Type: Book
ISBN: 978-1-78052-618-8

Keywords

Article
Publication date: 26 August 2014

Ning Du, John E. McEnroe and Kevin Stevens

The purpose of this paper was to examine whether a less precise (or imprecise) estimate may increase investors’ confidence and improve investors’ perceptions of fair value…

2719

Abstract

Purpose

The purpose of this paper was to examine whether a less precise (or imprecise) estimate may increase investors’ confidence and improve investors’ perceptions of fair value reliability. The main criticism of fair value accounting has been its lack of reliability perceived by investors.

Design/methodology/approach

A 2 × 3 randomized experiment was used where management incentive and information precision are manipulated.

Findings

The results from this study indicate that perceived reliability is jointly affected by management’s incentives and information precision. Reliability rating is the highest for fair value stated as a point estimate with a specified confidence level attached to it. Further analysis indicates that higher perceived reliability is related to its representational faithfulness because participants perceive that a point estimate with a specified confidence level better matches uncertainty in measuring future cash flows.

Originality/value

This is the first study to examine whether a less precise (or imprecise) estimate may increase investors’ confidence and improve investors’ perceptions of fair value reliability. Because of the subjectivity and uncertainty in fair value estimates, less precise fair value estimates may not be viewed as less reliable. In fact, using a precise format to represent fair value estimates may not be appropriate (neither reliable nor credible), because a precise point estimate fails to capture its underlying uncertainty in future cash flows. A less precise format could represent a credible choice for fair value because it reflects uncertainty and subjectivity and effectively communicates management’s assessments of variability in future cash flows.

Details

Accounting Research Journal, vol. 27 no. 2
Type: Research Article
ISSN: 1030-9616

Keywords

Book part
Publication date: 3 October 2007

John E. McEnroe

The integrity of audited financial statements has been widely criticized, especially over the last decade. Arthur Levitt, then chairman of the Securities Exchange…

Abstract

The integrity of audited financial statements has been widely criticized, especially over the last decade. Arthur Levitt, then chairman of the Securities Exchange Commission (SEC), brought widespread attention to the practice of earnings management in a speech he delivered in 1998 (Levitt, 1998). His successors in the SEC have also focused on the issue. The business media has also devoted much coverage to the topic and criticized the creative accounting practices of many well-known companies. These factors, in conjunction with the collapse of Enron and WorldCom, have probably engendered a loss of confidence in the credibility and transparency of audited financial statements. Two months after the Enron accounting irregularities became public, a Wall Street Journal article attributed a 250-point decline in the Dow Jones Industrial Average to concerns over widespread accounting misconduct (Browning & Weil, 2002). These same concerns were cited as a significant factor for the downward trends in the equity markets almost a year later (Browning & Dugan, 2002). The business media has offered numerous opinions such as these as to how investor confidence in audited financial statements has declined. However, a review of the literature found no corresponding empirical study conducted subsequent to the Enron and WorldCom revelations. Accordingly, this study examines the extent to which individual investors’ perceive that their attitudes involving the quality and usefulness of the information in audited financial statements have changed as a result of these events. The results indicate that investors perceive that a notable decrease of confidence in various dimensions of the quality and usefulness of this information has occurred. The findings indicate that accounting regulators and other parties should undertake actions to help restore investor confidence.

Details

Envisioning a New Accountability
Type: Book
ISBN: 978-0-7623-1462-1

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